Deal Structuring Participant

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Guilford Technical Community College *

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100

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Finance

Date

Jan 9, 2024

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pptx

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7

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Credit Memo [●] 2020
Executive summary Transaction overview Sources & Uses Pro Forma Capitalization Table Davis Industries Corporation (“Davis Industries” or the “Company”) is a medical devices manufacturer that delivers innovative infection prevention products and services for the healthcare market Davis Industries specializes in the following reportable segments: Endoscopy, Water Purification and Filtration, Health Disposables, and Dialysis For the LTM period ended July 31, 2017, Davis Industries generated revenue of $480.3 million and adjusted EBITDA of $99.8 million Davis Industries is currently exploring how to refinance existing debt on its balance sheet Davis Industries has $126mm of existing debt that is split into two tranches (“Tranche A” and “Tranche B”) that both mature later this year Davis Industries is considering putting in place a $200 million Revolving Credit Facility, the proceeds of which would be used to refinance Tranche A and Tranche B Pro Forma for the transaction, total leverage will be 1.3x based on LTM Adjusted EBITDA of $99.8 million Sources ($mm)     Before Transaction   After Transaction New Revolving Credit Facility 126.0 ($mm) Amount x EBITDA Amount x EBITDA Total Sources $126.0 Tranche A 80.0 0.8x Tranche B 46.0 0.5x Uses ($mm)   New Revolving Credit Facility - - Repay Tranche A 80.0 Total Debt $ 126.0 1.3x Repay Tranche B 46.0 Total Uses $126.0 Adjusted EBITDA $99.8 $ 99.8
Financial overview Davis Industries Corporation - Financial Summary                 FYE July 31,   FYE July 31, $ in millions 2015 2016 2017 $ in millions 2015 2016 2017 Income Statement : Cash Flow Statement : Revenue $353.1 $415.8 Cash flow from operations $39.1 $49.0 % growth 17.7% 15.5% Capital expenditures (7.9) (11.4) Free Cash Flow 31.1 37.5 43.1 Cost of Goods Sold 188.0 215.2 242.5 Gross Profit 165.1 200.6 Acquisitions (20.4) (65.0) Gross margin 46.8% 48.3% 49.5% Dividends paid (2.6) (3.1) Total operating expenses 116.3 142.6 172.9 Operating income 48.8 58.0 EBITDA calculation : Operating margin 13.8% 14.0% 13.5% Adjusted EBITDA $70.2 $86.3 $99.8       Net income 27.8 34.9 Credit ratios : Net profit margin 7.9% 8.4% 8.5% Total Debt / EBITDA 1.1x 1.3x 1.3x Debt to total capitalization 25.9% 31.7% 30.3% Balance Sheet : FCF / Total Debt 39.7% 32.4% 34.2% Cash and cash equivalents $19.8 $26.8 Accounts receivable 43.5 58.4 Inventory 45.1 57.3 Total assets 365.0 443.3 501.1 Accounts payable 10.1 16.4 Total debt 78.5 116.0 Equity 224.6 249.7 Liabilities and equity 365.0 443.3 501.1
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Business and industry overview Company overview Industry overview Medical device manufacturer market growth ($bn) Davis Industries is a leading provider medical equipment and sanitation products and services in the healthcare market: Surgical Instruments: Medical Sterilizers: Single-Use Medical Disposables: Customers No customer accounted for more than 10% of consolidated net sales during FY2017, FY2016, or FY2015 Total addressable markets (“TAM”) Surgical Instruments: [Size / growing at x%] Medical Sterilization: [Size / growing at x%] Single-Use Medical Disposables: [Size / growing at x%] Market drivers Aging US population Improvements in medical technology and upgrading clinics [TBU] Competition The overall market is highly competitive with peers such as: 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E $137 $142 $148 $154 $161 $168 $175 $184 $194 $205 $215 $227
Deal structuring Collateral analysis Risks and Mitigants Financial covenant package Covenant Rationale  Maximum Cash Flow Leverage Ratio: (Total Debt / EBITDA) Rationale: Assures adequate debt coverage Minimum Interest Coverage Ratio: (EBITDA / Total Interest) Rationale: Assures operating earnings can cover interest Minimum Fixed Charge Coverage Ratio: (EBITDA less Capital Expenditures divided by Total Fixed Charges) Rationale: Assures sufficiency of operating earnings for fixed requirements Minimum Tangible Net Worth Ratio: (Net Worth – Intangible assets) Rationale: Limits investments, directing cash flow to debt repayment  Minimum Liquidity Ratio: (Permit at any time its total of cash and marketable securities, to be less than a $ amount) Rationale: Assures satisfactory liquidity and tracks performance vs. plan Risk Mitigant Competition - Company faces rapid technology changes in the medical device and water purification industry. [●] Company shows top line growth year over year [●] Company research leads to patents resulting in a competitive advantage [●] Company has communicated to the bank that they have significant R&D investment in process Regulation - Industry is experiencing significant scrutiny and regulation by governmental authorities, which may lead to greater regulation in the future. [●] Company regularly participants in seminars and webinars for proper regulation education [●] Company has not presented any significant regulation issues historically Commodity Risk - Company is heavily reliant on certain raw materials and can be adversely impacted by rising prices. [●] Historically the company has been able to maintain strong margins [●] Company has a hedging strategy in place Collateral shortfall - $86,000m deficiency if revolver is fully drawn [●] Company has maintained strong and consistent cash on their balance sheet [●] Company has low cash flow leverage under 1.50x and has had low cash flow leverage historically [●] Company patents and performance warrants enterprise valuation which will be used as bank security Collateral description Eligible collateral value ($k) Authorized advance rate (%) Available collateral ($k) Accounts receivable $69,078 80% $55,262 Inventories $61795 50% $30897.5 Property and equipment, net $55211 50% $27605.5 Total collateral available $113765 Less: (commitments) $126,000 Excess / (deficiency) (122235) Don’t Recommend Borrowing base recommendation  
Term sheet Proposed terms and conditions Borrower: Davis Industries Corporation (the “Company”) Facility Type: Revolving Credit Facility Amount: $200,000,000 Tenor: 5 years Maturity: 5 years from closing date Spread (Interest Rate): 4.00% Undrawn Fee: 50 basis points Use of Proceeds: General corporate purposes Financial Covenants: Cash Flow Leverage covenant not to exceed 3.50x Cash Flow Leverage calculated as Total Debt / EBITDA Interest Coverage covenant not less than 3.00x Interest Coverage covenant calculated as EBITDA / Total Interest
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Financial Model Participant to paste excel model below – Below is for illustrative purposes only, not to be included   Year Ended July 31, FCF Model ($mm) 2017PF 2018P 2019P 2020P 2021P 2022P 2023P 2024P 2025P 2026P 2027P Revenue 480.3 525.0 588.0 646.8 646.8 646.8 646.8 646.8 646.8 646.8 646.8 % Growth 15.5% 9.3% 12.0% 10.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% EBITDA 99.8 105.0 117.6 129.4 646.8 646.8 646.8 646.8 646.8 646.8 646.8 % Margin 20.8% 20.0% 20.0% 20.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Interest Expense (5.4) (3.8) (2.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) Cash Tax Expense   (20.9) (23.5) (25.8) (129.0) (129.0) (129.0) (129.0) (129.0) (129.0) (129.0) Δ in NWC   (11.1) (15.0) (14.0) 153.7 - - - - - - Capex   (18.4) (20.6) (22.6) - - - (22.6) (22.6) (22.6) (22.6) Dividend payments   (4.2) (4.7) (5.2) - - - (5.2) (5.2) (5.2) (5.2) Free cash flow   46.6 51.9 60.8 670.5 516.8 516.8 489.0 489.0 489.0 489.0 Cumulative free cash flow   46.6 98.6 159.3 829.9 1,346.7 1,863.5 2,352.5 2,841.5 3,330.4 3,819.4         1867.0% 7-yr Payout     Mandatory debt repayments   - - - - - - - - - - Cash available for debt service   46.6 51.9 60.8 670.5 516.8 516.8 489.0 489.0 489.0 489.0 Cumulative free cash flow for debt service 46.6 98.6 159.3 829.9 1,346.7 1,863.5 2,352.5 2,841.5 3,330.4 3,819.4       Year Ended July 31, Covenant Projections ($mm) 2017PF 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E R/C facility 126.0 79.4 27.4 - - - - - - - - Term Loan A - - - - - - - - - - - Total Debt 126.0 79.4 27.4 - - - - - - - -     Leverage Ratio 1.26x 0.76x 0.23x 0.00x       0.00x 0.00x 0.00x 0.00x Leverage Covenant 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x EBITDA Cushion ($) 63.78 82.32 109.76 129.36       646.80 646.80 646.80 646.80 EBITDA Cushion (%) 63.92% 78.40% 93.33% 100.00%       100.00% 100.00% 100.00% 100.00%     Interest Coverage Ratio 18.44x 27.79x 59.99x 129.36x       646.80x 646.80x 646.80x 646.80x Interest Coverage Covenant 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x 3.50x EBITDA Cushion ($) 80.84 91.78 110.74 125.86       643.30 643.30 643.30 643.30 EBITDA Cushion (%) 81.02% 87.41% 94.17% 97.29%       99.46% 99.46% 99.46% 99.46%